Two Men Sentenced to Jail in Tobacco Tax Evasion Scheme

During the spring, stories about tax evasion prosecutions are in the news almost every day. A couple claims a home buyer or child care credit they aren’t entitled to receive… a business owner keeps two sets of books or someone simply stops filing returns; almost all criminal tax evasion cases relate to income tax, employment taxes or sales tax. Rarely do we read about tobacco tax evasion prosecutions.

Cross border cigarette smuggling is big business, however. Last year, Washington State is estimated to have lost $376,000,000 in tobacco tax fraud. That is enough to purchase 42 million packs of cigarettes there (and tens of millions more pack outside of Washington).

The tobacco tax in Washington is $3.02 per pack. Across the border in Oregon it’s just $1.31 and in Idaho, it is even less, just 57 cents. That makes cigarettes are twice as expensive in Washington than in neighboring Idaho.

If you think that disparity is bad, cigarette tax in New York City is authorized at $5.85 per pack while just a few hours south in Virginia the tax is just 30 cents. (Sales and state taxes make a pack of cigarettes 8 bucks more in NYC than in Virginia.)

Traditional tobacco tax evasion involves driving across the border and filling a van full of cigarettes. Those are then retailed by the carton or the pack at small convenience stores. More sophisticated crooks forge the state tax stamp often found on the bottom of cigarette packs. State revenue agents have the ability to trace tax stamp numbers but the average citizen just sees an ordinary tax stamp (assuming anyone even looks).

Prosecutions do happen, however. We were surprised this week when we read a press release from Alabama Attorney General Luther Strange announcing that two men had been sentenced to jail for a sophisticated tobacco tax evasion scheme. That makes 3 prosecutions in little over a year there.

Last Friday, a Jefferson County (Alabama) Circuit Court judge sentenced two Birmingham men to 46 months in prison on charges of tobacco tax evasion and possession of forged instruments. The men, Farhad T. Jiwani and Allaudin Merchant, are are wholesalers meaning they distribute cigarettes to local retailers such s gas stations and markets.

The men received split sentences meaning they only must serve 6 months of their 46 month sentence. If they remain out of trouble, the pair can serve their remaining 5 years on probation. The men also repaid the state $1,437,812.98 as restitution.

In November of 2012, another wholesaler in Alabama was sent to prison for tobacco tax evasion; Shamim Ahmed Khan also received a 6 months jail, 5 years probation split sentence.

In announcing the sentencing, Attorney general Strange said, “Our prosecutions of these cases send a strong warning that tax evasion will not be tolerated. These matters are serious crimes and we are committed to work together to thoroughly investigate such matters and see that violators are punished appropriately for their crimes.”

As states increase so called “sin taxes” (alcohol and tobacco), more and more people are resorting to cross border smuggling to avoid the tax increase. Whereas most folks wouldn’t dream of sneaking a bale of marijuana across the border from Mexico, many people have no qualms driving a truck load of booze or cigarettes across state lines. In both cases, the conduct is a felony.

To help more whistleblowers come forward, Congress and many states passed generous False Claims Act (whistleblower award) laws that pay whistleblowers with inside information to step forward and report these illegal schemes. To see if you qualify for an award, contact attorney Brian Mahany at *protected email**protected email* or by telephone at (414) 704-6731 (direct). All inquiries are kept in strict confidence and protected by the attorney-client privilege.